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Last December Lehman Brothers announced that its employees would be rewarded handsomely. Bonuses generally comprise 60 percent of an employee’s compensation at the bank, and in 2007 Lehman paid out $5.7 billion, a 10 percent increase from the year before. Richard Fuld, Lehman’s CEO, was awarded $35 million in additional stock.

Now that Lehman has declared bankruptcy, its past performance and financial statements will face new scrutiny from creditors, who may attempt to recoup those bonuses if they can prove that the bank was not as solvent as it seemed.

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“There is a possibility that creditors might launch a legal battle to reclaim some of the bonuses that were paid out last year,” says Paul Hodgson, a senior researcher at The Corporate Library. “Their argument would be that the bonuses were for short-term achievements that were not based on reality.”

Hodgson noted that Lehman does not have a clawback provision in place that would force executives to reimburse the firm for incentive payments, or profits from the sale of stock, awarded in the year prior to an accounting restatement that reflected misconduct. Bonuses that paid for completing specific transactions would be difficult to recoup, Hodgson said, but those relating to earnings or mortgage-backed securities would be more accessible.

“The key question is whether Lehman was solvent when it paid out the bonuses,” wrote Adam Levitin, a law professor at Georgetown University, on his bankruptcy blog Credit Slips. “On an equity basis, almost assuredly yes, but on a balance sheet basis, that might be a closer call, depending on how things like MBS and CDOs are valued.”

If the bank was not solvent when the bonuses were awarded, Levitin explained, the payout could be considered a “fraudulent transfer.” One successful claim could challenge all of the bank’s bonuses. A Lehman spokesperson could not be reached for comment.

The Lehman bonuses likely will be scrutinized under bankruptcy rules that govern constructive fraudulent conveyance or preference payments. In 2005, Congress passed The Bankruptcy Abuse Prevention and Consumer Protection Act, allowing trustees and creditors to examine bonus pay under those two scenarios.

Rules related to constructive fraudulent conveyance allow creditors to examine two years worth of bonus pay in determining whether executives will have to return the payouts to the bankrupt company’s trustee, says Jack Williams, a managing director at BDO Consulting and a bankruptcy professor at Georgia State University’s College of Law.

Preference-payment rules allow creditors to look back one year if the executive or officer receiving the bonus is considered an “insider” under bankruptcy rules, says Hal Schaeffer, president of D&H Credit Services. Otherwise, preference claims extend back only about three months.

Preference claims are meant to prevent an insolvent company from favoring one creditor at the expense of another. In practical terms, the bankrupt company has the right to sue vendors to force them to return payments that were made within 90 days of the bankruptcy filing.

Schaeffer says that “99 out of 100 times [bonuses] won’t be called a preference claim,” but rather a fraudulent conveyance. However, the trustee could go either way.” He adds that creditors and trustees often sue under fraudulent conveyance because there is no formalized defense for the claim, as is the case with preference payments. For example, if there is evidence that a preference payment was made in advance, cash on delivery, in the usual course of business, or is backed by surety bonds, the preference claim may automatically be denied, explains Schaeffer.

The key for creditors in the Lehman case will be to prove that the bonuses were not paid out in the ordinary course of business, says Williams. “That point will be debatable,” says Williams, who reckons creditors will have to prove that paying out bonuses to managers who ran the company into bankruptcy was considered business as usual.

If creditors do not find any wrongdoing among Lehman employees, they will be hard-pressed to recoup any bonuses, says Richard Smith, a senior vice president of the compensation advisory firm Sibson Consulting. “Even though the company is down, according to the structure they had, they earned those bonuses,” says Smith, referring to the majority of Lehman employees. “They may try to go for the senior executives and look at their contracts.”

Lehman’s bonuses — like the bonus pay at other banks — were based on short-term incentives, says Seth Jayson, a senior analyst at Motley Fool, an independent research firm and investor website. But the short-term view “doesn’t work out well in the long term,” he adds.

Derivatives and other complex instruments that banks count as part of their earnings are opaque and hard to value, making reported earnings in essence an “opinion” based on in-house models. “It was a grand shared delusion [among banks, investors, and politicians] that this stuff was worth more because someone was willing to pay more for it,” says Jayson.

And while the valuations usually are made in good faith, they may be incorrect, and “can become fiction quickly.” In defense of fair-value accounting, Jayson adds, “Everyone likes to blame measurement schemes, when all it does is reveal the actual situation.”

Creditors and shareholders have sought to recoup bonuses in the past with varying levels of success. In 2003, former Enron employees had little luck when they sued the energy company’s executives for $73 million in bonuses they had received. In the 1990s, however, regulators sued former employees of Drexel Burnham Lambert, an investment bank that declared bankruptcy in the wake of collapse, for $250 million of bonuses that many agreed to repay. Lehman’s Fuld may have less to hold onto, as he announced in July that he would forgo his 2008 bonus due to the bank’s poor performance.